Reason Foundation

Raskin and the Fed are Wrong to Inflate Stocks

In an article published today over at RealClearMarkets.com I argue that putting the horse before the cart pumping equity prices through monetary policy does nothing to improve the economy. Only when rising asset prices reflect gains to the economy as a whole, and not simply gains to the supply of money, do all members of that economy benefit.

In a society with a highly polarized wealth demographic, targeting specific assets through price inflation benefits only the holders of the assets targeted.

The Fed claims that most wealth is held in stocks, business equity, and real estate so they direct policy towards inflating those assets where wealth has accumulated. Fed Governor, Sarah Raskin pointed this out to explain why the Fed is foregoing helping savers who have money saved in interest bearing assets such as checking accounts, CDs, and savings bonds. Those savings are actually losing money to inflation, a drawback the Fed acknowledges, but dismisses nonetheless because most wealth is allocated in stocks etc.

The problem with the Fed’s assessment, and therefore their rationale for pumping these select assets, is that a majority of Americans don’t even hold, for instance, a single share of stock. It’s all held, not surprisingly, by the wealthiest of Americans. For the bottom 75 percent of all families, only 11 percent of them own stock. And of those, the average value of holdings is only $10,600. For families in the top 10 percent, the average value jumps to $683,500. They are the ones holding all the assets being inflated. And because it’s driven by easy money, and not the productive efforts of the members of the economy as a whole, most Americans are being starved of much needed investments in productive assets that provide employment, innovation, and efficiency gains leading to enhanced purchasing power and living standards. Instead, potential investments are being lured away into an artificially rising market.

From the article:

"The Dow's recent rise above 13,000 arguably owes much of its appreciation to the accommodative monetary policy of the Federal Reserve. This should not, however, be a reflection of an improving economy as Fed chairman Ben Bernanke is so quick to reference and take credit for. Much of the profits and investments of Dow Jones and S&P 500 companies take place and stay in other countries and do not benefit Americans who are themselves not invested.

And invested they are not. According to the same Fed report from Raskin's speech, the average value of stocks held by the bottom 90 percent of American families is $16,785. This pales in comparison to the wealthiest 10 percent of American families whose average value of stock holdings is $683,500.

But so what? So the rich are getting richer as the bulk of household wealth is being targeted and inflated by the Fed's free money. Doesn't that ultimately benefit those at the bottom as well?

Under today's fiscal and monetary policies, absolutely not.

A growing economy only benefits the economy as a whole, and thus those at the bottom, if growth comes in the form of operational innovation and gains in productive efficiencies. This means the ability to do more with less, to grow by leaps and bounds while driving down the cost of inputs. This was the case in the ‘80s and ‘90s, where for two decades technological and industrial innovation and efficiency gains allowed America to grow tremendously while having little to no effect at all on the price of commodities and the relative cost of labor. Real mean incomes grew nearly every year between 1981 and 2000 and 38 percent over the entire period according to the U.S. Census Bureau. Real wealth was created. The economy grew as a whole.

Then loose fiscal and monetary policies entered the story, and over the past decade the exact opposite has occurred. Commodity prices are skyrocketing, real mean incomes are at 1997 levels; having fallen nearly every year since 2000 according to the Census, and yet the relative cost of labor in America is still high. Real wealth is not being created."